What Is a Hard-To-Borrow List?
Let me explain what a hard-to-borrow list is: it's an inventory record that brokerages use to show which stocks are difficult to borrow for short sale transactions. As a brokerage client, you should know that this list provides an up-to-date catalog of stocks that can't easily be borrowed for shorting.
You can compare the hard-to-borrow list with a brokerage's easy-to-borrow list, which I'll cover later.
Key Takeaways
Short sellers like you rely on brokers to have stock shares available to borrow. If the broker has very few shares of a stock available, that stock ends up on the hard-to-borrow list. Stocks on this list may not be short-sellable or could come with higher stock loan fees.
Understanding the Hard-To-Borrow List
Short selling stocks is based on the idea that you, as a trader or investor, can profit from a decrease in a stock's price by borrowing shares from your broker. Brokerages have various ways to provide access to shares for shorting, but there's always a finite number of shares available.
Once the available shares are close to running out, the broker will note this on their platform. This alerts you that if you try to short sell that security, your trade order might be refused. Remember, short supply isn't the only reason a security might be on the hard-to-borrow list—it could also be due to high volatility or other factors.
To enter a short sale, you must first borrow the shares from your broker. The broker can use its own inventory, borrow from another client's margin account, or from another firm. As the borrower, you'll pay interest and fees on those shares, and ones on the hard-to-borrow list often have higher fees because they're in shorter supply.
If you're an investor entering short sales, you're trying to capture profits in a declining market. For instance, if you think Apple's shares will drop, you can short sell them and buy back later for a profit if the price falls as expected. But if the stock rises, you'll lose money.
Hard-to-Borrow List Requirements
Brokerage firms update their hard-to-borrow lists daily. Before executing your short sale, the broker must be able to provide or locate the shares to loan you.
Regulation SHO, implemented on January 3, 2005, includes a 'locate' condition that requires brokers to have a reasonable belief that the equity can be borrowed and delivered. This regulation prevents naked short selling, where you'd place a short sale without holding the shares.
Hard-to-Borrow List vs. Easy-to-Borrow List
The hard-to-borrow list is the opposite of the easy-to-borrow list, which is an inventory of securities available for short sale transactions. Generally, you can assume that securities not on the hard-to-borrow list are available for shorting. While the hard-to-borrow list is usually internal and not shared with clients, you typically have access to the easy-to-borrow list.
You might have to pay hard-to-borrow fees on certain short sales, and the cost is usually higher for stocks on the difficult list than for those on the easy one. Large brokerage firms often have a securities lending desk to source hard-to-borrow stocks and also to lend securities to other firms.
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